Merger Mania Has Clearing Firms Scrambling

With banks merging right and left, the firms that execute their brokerage transactions are jockeying for position.

Mergers are reducing the number of bank brokerages along with that of the banking companies that oversee them. And this is a mixed blessing for companies such as BHC, Pershing, National Financial, and Stephens Inc., which have a lock on more than 65% of the bank brokerage market.

These companies stand to pick up substantial business if they end up as sole providers of clearing services to newly consolidated banks. But if they lose, a big revenue stream can disappear.

"It's tough," said William T. Spane, president of BHC Securities, Philadelphia."Every time a merger happens, we have to go in and compete with another firm that's already on the same level as we are."

The stakes are significant. Once a clearing firm grabs a bank contract it will most likely keep it, unless the bank goes through a similar upheaval or decides to clear for itself, said Geoffrey Bobroff, head of an East Greenwich, R.I., consulting firm that bears his name.

"Whether the clearing firms like it or not, they are going to have to prove themselves to these banks," Mr. Bobroff said.

Indeed, clearing firms are already competing furiously for banks' business. "Right now it's a price war, and whoever can break out services and deliver them at a reasonable cost is going to come out ahead," said an industry source who asked not to be identified.

The best illustration of the tug-of-war that clearing firms face today is probably the proposed merger of Chemical Banking Corp. and Chase Manhattan Corp.

Chase clears its retail investment sales through National Financial and BHC, while Chemical uses Pershing. The firm that nabs the new Chase could bring in millions of dollars in revenue from sales of mutual funds and other investments, said Kerrin H. Long Jr., an analyst at Brown Brothers Harriman, New York.

Clearing firms generally receive between $18 and $25 per trade, or sale, of a security. Some brokerages arrange for a percentage of the transaction's face value to paid instead of a flat fee, he said.

"In the short term, this might not have much of an impact" on the clearing firms, Mr. Long said, "because neither Chemical nor Chase has significant retail securities activity."

But the choice "will be felt a few years from now, when these banks start to generate a sizable volume of securities business," he said.

In a recent interview at the Jersey City headquarters of Pershing, Alton C. Jones, the firm's managing director, said he wasn't worried about the outcome of bank mergers.

Pershing's clients include First Union Corp. and Banc One Corp., both of which have been heavy acquirers in recent years. Pershing employees, Mr. Jones said, are "old hands at the merger game."

He added that the company, a division of the securities firm Donaldson, Lufkin & Jenrette, is diversified enough to weather any effects bank consolidation may have on its business.

So too say the executives at Stephens Inc., a Little Rock-based regional brokerage that also does clearing work for banks and other brokerage firms.

Larry Bowden, managing director of financial services, said the firm has had to be flexible in the past in order to retain bank business. Stephens was able to hold onto the clearing contract for NationsBanc Discount Brokerage Inc. even after the giant banking company forged a partnership with Dean Witter for its full service brokerage operation.

"We're not going to sit back and be passive," said Greg Feltus, senior vice president. "As soon as we hear about the possibility of a bank merger we try to open the door for possible future discussions" with the banks' brokerage chiefs.

Neither Stephens nor Pershing nor National Financial, a unit of mutual fund giant Fidelity Investments, depends heavily on banks for business. But the fourth big player, BHC, does about 60% of its business with banks. Observers say BHC could be hard hit by the latest wave of bank consolidation unless it can win over some contracts.

BHC has invested heavily in the investment operation of Chase, its largest client. Though it shares the stage with National Financial, sources say, BHC trained and supported most of Chase's brokers and helped design a no-load mutual fund service for the bank. (The no-load program is in limbo pending the merger.)

Mr. Spane would not discuss what impact the Chase-Chemical merger might have on his firm. It's too soon to tell who will come out on top, he said.

He added that "there seems to be a wave of community banks ... fresh and ready to get into the brokerage business," and that new business should compensate for any defections among its larger-bank clientele.

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